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CA Intermediate · Advanced Accounting · AS 29 (Revised) Provisions, Contingent Liabilities and Contingent Assets

Kaveri Pharma Ltd. decided on 10 March 2026 to close a manufacturing unit at Hosur. The board approved a detailed formal plan on 20 March 2026, and on 28 March 2026 the plan was announced to employees and their representatives, who were told of the termination benefits. Estimated costs: termination benefits to employees Rs 18 lakh, retraining of continuing staff Rs 4 lakh, relocation of retained employees Rs 3 lakh, and future operating losses of the unit up to closure Rs 7 lakh. What provision for restructuring should be made at 31 March 2026?

The provision is Rs 18 lakh. The plan was announced to those affected before the year end, creating a constructive obligation. Only direct costs necessarily entailed by the restructuring, such as termination benefits, are provided; retraining, relocation and future operating losses relate to continuing activities and are excluded.

  1. ARs 32 lakh
  2. BRs 25 lakh
  3. CRs 18 lakhCorrect
  4. DRs 21 lakh

Explanation

A constructive obligation exists because the plan was announced to those affected before the year end. A restructuring provision includes only direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities, here the Rs 18 lakh termination benefits. Retraining, relocation and future operating losses are excluded. Rs 21 lakh wrongly adds the operating losses, and Rs 25 lakh wrongly adds retraining and relocation.

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